FOUR PHASES OF A BUSINESS CYCLE
Business cycle also known as economic or trade cycle is the period in which levels of the GDP (gross domestic product) fluctuate upwards and downwards in the levels of business activities. The National Bureau of Economic Research is responsible for establishing the beginning and the end of a cycle. Variables that affect business cycle include time, competition, sales, and financial affairs. Natural resources, physical capital, human resources and technology are factors that influence economic development of a country.
There are four stages in a business cycle. They include peak, expansion, trough and contraction. There is no definite time or duration in which a business cycle occurs. According to the Congressional Research Service, the U.S. experiences longer expansions than contractions since World War II. Between 1945 and 2019, average expansion and recession cycles have lasted 65 and 11 months respectively. Between 2009 and 2020, expansion was recorded the longest with 128 months.
Monetary policy and fiscal policies are measures the government takes to control business cycle. The government is in charge of fiscal policy while the nation’s central bank takes charge of monetary policy. It is important for investors to understand this cycle as it helps them determine which measures work best in what cycle.
Expansion is a period when the economy can be termed as stable. During this stage, businesses run smoothly, companies make profit and employment levels are high. Demand and supply of goods increases as consumers are buying and investing. There is a steady cash flow. Production rates are usually high while interest rates are low. According to Ali Hussain and Stephanie Ashe when the GDP growth rate is in the 2% to 3% range, inflation is at the 2% target, unemployment is between 3.5% and 4.5%, and the stock market is a bull market, then the economy is considered to be in a healthy period of expansion.
Peak. It can be termed as the climax. This is the phase where businesses are more productive as they grow at a high rate. The rate of employment is relatively high and there is stability in the market. Businesses are usually at their maximum hence cannot accommodate more growth. For this reason, they start performing poorly due to the saturation in the market areas. After businesses go through this phase, the contraction cycle follows.
Contraction lies between peak and trough cycle. It is the period when economic levels start deteriorating. The rates of unemployment go high and businesses strive to survive. Businesses start incurring losses and there is a poor cash flow. People cut on expenses and use their savings to satisfy important needs. The government however may intervene by reducing interest rates on loans and reducing taxes as this helps in improving economic status. By creating a conducive environment for businesses, economic levels rise. The economy is said to be in recession when the GDP has decreased for two consecutive quarters.
Trough. At this level, the economy of a country tries to recover from contraction to peak. The GDP starts increasing. Things start going back to normal. The demand and supply for goods and services increases. The rate of employment and the cash flow in a country multiplies. Businesses start making profits. Interest rates resume their normal rates.
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